Grand Canyon Education, Inc.

Good day and thank you for standing by. Welcome to the Q1 2023 Earnings Conference Call for Grand Canyon Education, Inc. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Chief Financial Officer Dan Backus. Please go ahead.

Joining me on today's call is our Chairman and CEO, Brian Mueller. Please note that many of our comments today will contain forward-looking statements that involve risks and uncertainty. Various factors could cause our actual results to be materially different from any future results expressed or implied by such statements. These factors are discussed in our SEC filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. We undertake no obligation to provide updates with regard to the forward-looking statements made during this call, and we recommend that all investors review these reports thoroughly before taking a financial position in GCE. And with that, I will turn the call over to Brian.

Good afternoon and thank you for joining Grand Canyon Education's first quarter fiscal year 2023 conference call. GCE had a very good quarter, exceeding enrollment expectations, exceeding consensus revenue estimates at $0.5.6 million and producing a four cent beat in adjusted diluted earnings per share to consensus. Given how most of higher education is coming out of the COVID years, these are excellent results. Most importantly, GCU Online produced significant new enrollment growth for the third consecutive quarter over a prior year, and that momentum is expected to continue into the second quarter of 2023. I want to begin again by taking a step back and explaining why this is happening and briefly review what has happened since the GCE-GCU transaction took place almost five years ago. I have often said that in the past, small and elite has won the day in higher education, especially in areas like U.S. News and World Report rankings. In the future, it will be institutions who are large, scalable, and flexible in how they offer higher education. We expect to impact adults across the lifespan using technology to build platforms that take into account the life situation of the student and the nature of the content and skills that need to be learned. GCE has invested approximately $300 million producing its own learning management and administrative system that allows it and its partners to manage over 7,000 full-time and adjunct faculty members, 112,600 students, and over 320 academic programs, emphases, and certificates across four delivery platforms. This system has automated processes including admissions, transcript collection, and evaluation schedule building, financial aid processing, faculty recruitment, faculty assignment and payroll, content acquisition, assessing learning outcomes, student teacher placement, counseling and social work internships, and the list goes on. The administrative capability of the system allows faculty and students to focus on the learning, which is still in a small group, instructor-led process that is highly interpersonal, collaborative, focused on writing, critical thinking, and problem solving, and produces outstanding outcomes. GCE currently employs approximately 4,000 full-time professionals and approximately 1,500 student workers as it continues to build out its capabilities to grow faculty, students, programs, and delivery platforms for its university partners. Leveraging its infrastructure has allowed GCE's partners to expand programs that are critical to the economy. maintain tuition levels in a period of rapid tuition increases across the country, and make access to higher education affordable to all socioeconomic classes of Americans without any burden on the taxpayer. In the almost five years since GCE has become a service provider, it has helped its partners accomplish the following. In that time, GCE's Health Grand Canyon University graduated 130,276 students, 35,815 in education, including 16,537 first-time teachers at a time when teacher shortages have created a national crisis. 37,685 in nursing and healthcare professions, including 1,767 pre-licensure nurses at a time when there is a huge shortage of nurses. 24,863 in the College of Humanities and Social Sciences, including thousands in counseling and social work, where there are also huge shortages. College of Business has become one of the largest business schools in America and has produced 22,151 graduates. The College of Science, Engineering, and Technology has grown by 183% and provided 4,539 graduates. The Doctoral College, Honors College, and College of Theology also continue to grow. The numbers that I have just cited have all happened in the almost five years since GCU has become A non-profit institution and GCE has become an education services provider. Our partnership with GCU has given it the ability to invest $576 million additional dollars in academic and residential life infrastructure for its ground traditional campus, bringing a total investment to almost $2 billion. Currently, the campus is ranked 16th in the country by Niche.com. Very importantly, GCE has assisted GCU in opening 138 new academic programs, emphases, and certificates during the almost five years. 12.9% of the new students enrolled in the first quarter enrolled in these new programs. During this time, GCU has not raised tuition on its ground traditional campus with only nominal increases in certain programs online. As a result, GCU students take out less debt than the average state university student. GCU students take out only 50% in parent loan amounts compared to students at our three state universities. GCU students have a 1.5% cohort default rate on student loans compared to the almost recently released national average of 2.3% and has a 90-10 calculation of 66.2% for GCU's hard-earned financials. In addition, GCU has accumulated over $400 million in cash and investment reserves while going through with annual salary increases every year for all faculty and staff. Compared to the declining enrollments and negative financial trends in higher ed across the country that accelerated during COVID, this model has produced significant results for GCU, the state of Arizona, and the country. Grand Canyon University was also ranked as the third best employer in Arizona in the 2022 Forbes America's Best Employers by State report. During this same time period, GCU has established 26 additional university partnerships. These partnerships, along with our partnership with GCU, have created 36 locations to produce healthcare professionals, especially baccalaureate prepared nurses. This is extremely important work, since the country is expected to need 1.3 million additional nurses in the next five years alone. The number of existing and new partners will eventually lead to 80 locations across the country. Since January 2019, 9,318 students have graduated from our other university partners, ABSN or OTA programs. I wanted to include this brief summary because there is currently a lot of discussion about the future of higher education. Regardless of political or ideological positions, discussion should focus on where the economy is going and where the new jobs and careers are going to be. Models that can scale and offer opportunities for access to all socioeconomic classes of Americans at no expense to the taxpayer should be supported. Critics point to the revenue share model as bad for universities. The past two years have proven them wrong, and we expect in the next year this will become even more apparent. In inflationary periods like the one we are currently experiencing, or when demand declines as it has, GCE as the service provider absorbs the majority of the financial risk. And our expertise, technology, and processes have allowed our university partners to continue to benefit during these challenging times. Now I want to review the four pillars of delivery platforms at Grand Canyon Education. First, DCU's traditional campus saw an increase of 8.9% in new students in the fall of 2022 over a prior year, an increase of 8% in total Brown traditional enrollment, and an increase of 10.5% in residential enrollment. Approximately 70% of Brown traditional students lived on campus. The average incoming GPA for the 2022-23 class rose to 3.6 in the prestigious Honors College's 8.3% year-over-year with average incoming GPAs of 4.1. Traditional campus spring enrollment was slightly better than expected due to better than expected fall to spring retention. These are remarkable results given the fact that undergraduate enrollment declined by 4.2% nationally between fall 2020 and fall 2022, where during the same period of GCU's ground traditional enrollment increased by 18.3%. We expect Fall 2023 new enrollments to be between 10,000 and 11,000. The quality and irrelevancy of GCU's academic programs, the low class sizes in support of its faculty that has less than a 6% turnover rate, the quality of counseling services, the 20 advisory boards of over 500 companies represented who are creating internships, employment opportunities for GCU students, and the very affordable tuition which hasn't been raised in 15 years are all important contributing factors. I also want to mention, unlike the national trend, over 2,600 of the 9,300 fall to 2022 new students this year were first-gen college students. The average incoming GPAs of these first-gen students is 3.55, or almost identical to the incoming class overall. These students are largely from lower socioeconomic strata, but their enrollment at the university, because of the very affordable tuition rate, is going directly against the national trend. and it's a very positive part of the GCU-GCE story. As I said before, in the fall of 2023, we are anticipating between 10,000 and 11,000 new students. We are under construction at two new residence halls that will increase the number of beds on campus by 1,500. The number of new students will ultimately depend on the retention of continuing students and their desire to remain on campus and the competitive environment given the trends we've discussed previously. less high school graduates, and less graduates directly going to college. Pillar two, working adult students attending GCU online. As with traditional students attending universities across the country, 2021 saw a downturn in working adult students attending online. Unlike with traditional students attending GCU's campus, we experienced a downturn in online students as well. GCU has worked with GCU on two main strategies to combat the downturn, and we are now seeing positive growth again. Number one, we have invested in B2B strategies that are well-timed for this post-COVID period. The supply and demand, at least in the short run, for educated labor has split. Since the country has reopened, we are working with over 26,850 industry partner locations in K-12 education, health care, financial services, social service agencies, technology and engineering companies, military bases, et cetera. developing custom strategic initiatives that are helping organizations grow their talent from inside. The number of new students that started through these strategies grew 24% over the prior year in the first quarter. Number two, GCE continues to work with GCU to roll out new and relevant programs. Since the transition almost five years ago, GCU has rolled out 138 new programs and the season certificates. 12.9% of new students enrolled in these programs in this latest quarter. This has resulted in first quarter new online enrollments growing in the low teens over the prior year, and we are currently projecting new enrollment growth in the second quarter of 2023 to be similar, high single digit to low teens. Based on these trends, we return to total online growth this quarter. It is important to note that this return to positive growth has been accomplished with no loss of strength in the quality of GCU's online student body And as a result, no degradation of the quality metrics, including good graduation rates, low cohort default rates, and continued low student debt amounts. We anticipate new enrollment growth to again be in the high single-digit low teens in the second quarter. And then we'll begin to return to our long-term objective of mid-single-digit growth in the back half of the year as times get much tougher. This should allow us to grow total enrollment on a year-over-year basis in the low to mid single digits by the end of the year. Next, I would like to discuss GCE's third pillar in healthcare partnerships. Short-term, COVID has had a negative impact. Hospitals were extremely busy, preoccupied with COVID patients, and many clinical placement opportunities were canceled. Despite these very significant challenges, many instructional assignments requiring one-on-one clinical interaction in the hospital were replaced by simulations. Some of our university partners requested that we reduce the cohort sizes due to concerns about the lack of clinical capacity. And some of the new sites that we've hoped to open, especially in large markets, have been pushed back to the fall 2023 or 2024. Although positive signs are emerging on this front, the tight labor market has had a significant impact on the type of student interested in re-careering into nursing. When we acquired Orbis in 2019, their partnerships were predominantly focused on post-baccalaureate students. Those that had already completed a bachelor's program and having a completed bachelor's degree was a requirement to start in the ABSN program. Students that did not have a bachelor's degree were turned away. Today, the majority of the students interested in re-careering into nursing have not completed a bachelor's degree. Thus, we have been working with our partners and their state nursing boards to adjust these programs to allow students with 60 plus college credits to gain admittance into the ABSN program. In addition, in partnership with GCU, we have created a much less expensive and more efficient way for these students, for students that do not have a bachelor's degree but don't have the science prereqs to complete the coursework necessary to start in the ABSN program. These challenges have, in the short run, caused some of our mature locations that were at capacity to shrink and some of our newer locations did not grow as fast as we would have expected, while other mature locations remain at or near capacity. and some newer locations are meeting our new enrollment expectations. We believe that these strategies will re-accelerate growth. As we work through this, we will be much more selective in the new locations that we open. We plan to open two new sites with GCU in the Phoenix area in the fall of 2023. Our hope for that will be to open a new site with a new partner in Southern California in the fall. as well, although permitting issues continue to hold up our ability to start construction on that site. We also plan to open a couple of smaller sites with new partners that we were committed to previously. I am very pleased to announce that the GCU locations grew 27.2% year-over-year from 283 to 360 students. This is extremely important because GCU would ultimately like 40 of our 80 locations to be GCU locations. This relationship is good financially for GCU, but it is also good for GCE, given GCU's national footprint and brand recognition, the essence of its nursing program, and its proven ability to scale. As with GCU's traditional campus, the long-term environment is very positive for these GCE health care partnerships for the following reasons. Number one, the country needs 1.3 million additional nurses the next five years alone. Nursing programs are very expensive to operate, and given the financial pressures facing many universities, they will be unable to invest the dollars it will take to scale the programs. Number two, GCE has the capital to invest in the continued build out to eventually 80 locations. Number three, in addition to the runway of 80 locations, up from 36 locations currently, our enrollment budget for the coming year is only 50% of the actual spots that exist today. 50% shortfall is largely due to the lack of efficient and highly supportive prerequisite course environments, regulatory issues creating slowdowns in opening plan locations, and the lack of clinical placements due to COVID issues. Most important, there are now over 1,200 students in GCU's accelerated online science courses preparing to earn spots in one of our 36 locations. These are eight-week courses taught mainly by full-time faculty members and provide tremendous academic support services. There are multiple start opportunities on an every month basis. We expect at 1,200 numbers to continue to grow and be a leading indicator of our ability to re-establish growth on the hybrid campuses. GCE is working hard and investing in new enrollment, simulation, virtual reality, and prerequisite strategies to be future fill all the spots that are available. This is a transitional year for the healthcare partnerships. However, there is a 10-year runway that is very promising. It creates a winning scenario for students that want into a promising career, healthcare providers desperately needing professional nurses, and universities who want a low-risk way to help solve the nursing shortage while at the same time creating additional revenue streams. Last, we continue to see good results in our fourth pillar certificate programs. We are extremely excited because these programs are desperately needed in higher education today. This past September, we launched a certificate program in partnership with GCU's newly formed Institute for Workforce Development. This certificate is referring students for a professional electrician's apprenticeship program. This is a 16 credit hour, one semester program heavily focused on the mathematical concepts necessary to prepare for a career as an electrician. This program has been designed with a major industry partner who is offering apprenticeships to the students successfully completing this program. This partner needs 1,000 electricians for their business in Arizona alone. This partner also indicates that the country is short the minimum 100,000 electricians necessary to complete the building project currently underway. Last fall, 300 students applied for this program. We accepted 40 into the program. 39 of the 40 students from that class completed their program successfully, and the feedback that we have received from our industry partners has been very positive. An additional 200 submitted applications for the spring semester, and we accepted another 40 in the spring. 35 of those students completed their program successfully. Once the concept is proven, there is the potential to scale this program in a significant way. We have had many additional industry partners who have expressed interest in participating. Service revenue was $250.1 million for the first quarter of 2023, an increase of $6 million, or 2.5% as compared to $244.1 million for the first quarter of 2022. The increase year-over-year in service revenue was primarily due to an increase in GCU traditional campus enrollments and an increase in revenue per student year-over-year partially offset by a decrease in hybrid enrollments, primarily students, and our university's partners' occupational therapy assistance program. Operating income for the three months ended March 31, 2023, with $74.5 million, a decrease of $3 million, as compared to $77.5 million for the same period of 2022, as we continue to invest to meet our clients' enrollment goals. The operating margin for the three months ended March 31, 2023, with 29.8%. compared to 31.7% for the same period of 2022. Then income increased 2.6% to 59.6 million for the first quarter of 2023, compared to 58.1 million for the same period of 2022. GAAP diluted income per share for the three months ended March 31st, 2023 is $1.94. As adjusted, non-GAAP diluted income per share for the three months ended March 31st, 2023 is $2.04 over consensus estimates. With that, I would like to turn it over to Dan Backus, our CFO, to give a little more color on the 2023 first quarter, talk about changes in the income statement, balance sheet, and other items, as well as to discuss the updated 2023 guidance. Thanks, Brian.